The FCA’s consultation (CP25/27) on a potential redress scheme for historical motor finance agreements involving discretionary commission arrangements (DCAs) is arguably one of the most significant regulatory interventions since the Financial Services Act 2012. 

It’s a complex case involving hearings in the highest courts of the land and it exposes a significant challenge for all regulated firms – the application of today’s standards in reviews of yesterday’s conduct.

Few would disagree that the FCA has a difficult task in delivering its primary statutory objectives – protecting consumers and ensuring market integrity – during this age of rapid change. The regulator is under constant political pressure to update supervisory approaches, and this often means that once-compliant conduct might later be deemed detrimental.

High-volume traffic: millions of agreements could be deemed unfair

In the context of car finance, it is estimated that 14.2m agreements (44 percent of all agreements made since 2007) could be unfair because they involve inadequate disclosure of one or more of the following:

• a discretionary commission arrangement
• high commission (where the commission is equal to or greater than 35 percent of the total cost of credit and 10 percent of the loan)
• contractual ties that gave a lender exclusivity or a right of first refusal

However, the FCA has proposed three scenarios in which firms might be able to rebut the presumption of unfairness.

Firstly, there is evidence of adequate disclosure of the relevant arrangement in question. Secondly, the lender can provide evidence that the broker selected the lowest interest rate at which they would not have made any additional commission, in cases only featuring a DCA. Or thirdly, the lender can provide evidence that the consumer was sufficiently sophisticated to have been aware of the relevant feature(s), if disclosure of the arrangement in question was inadequate.

Audit trails: using the past to protect the future

These three scenarios, if adopted as part of a motor finance compensation scheme, point to a key consideration for regulated businesses. That is, the need for firms to possess a robust, contemporaneous record of their actions and decisions.

Having a clear, detailed audit trail isn’t just about proving you are meeting the rules today. It’s about being able to demonstrate why you made certain decisions years ago. For firms under scrutiny over car finance commission payments, this could enable you to prove adequate disclosure or customer sophistication.

In short, it’s your primary defence against having past actions judged unfairly by future standards. But robust records entail much more than just storing information on old files. They require:

• Structured data: Easy access to records relating to product governance, sales processes, commission structures, complaints handling and compliance monitoring.
• Clear rationale: Evidence of why decisions were made, linking them to the regulatory understanding prevalent then.
• Consistent application: Proof that policies and procedures were applied consistently.

Scope of use: evidence that serves more than compliance

In addition to meeting the regulator’s need for accurate and detailed information, audit trails can serve an invaluable purpose in the context of litigation and fundraising rounds.

Legal teams can confidently use reports to build a defence against claims, while investors and partners find it easier to make a positive decision when based on indisputable evidence of compliance. Insurers are also able to provide more appropriate professional indemnity cover when a comprehensive company record is placed at their fingertips.

From hindsight to foresight: why preparing for uncertainty is a strategic necessity

In summary, while it’s impossible to predict whether any present financial services practices will find themselves subject to regulatory hindsight, it is possible that a set of high-quality records could prove you acted fairly and in a compliant manner.

Having a comprehensive, easily auditable trail is a strategic necessity. By putting robust systems in place today, firms can build resilience against the uncertainties of tomorrow.